Procurement case study: Holyrood 1997

 The Holyrood Building

 

The story of the building of the new Scottish parliament house, The Holyrood Building, is another instructive case study. In 1997 it was announced that the new parliament building was to be constructed and the cost estimate was £40 million. A design competition was held, one year later in 1998, and a construction management contract was awarded to Bovis Lend Lease at the beginning of 1999. 

The initial client was the Scottish Office, then after work started this was transferred to the Parliamentary Corporate Body, and later the Presiding Officer and an architectural advisor were added. A report in 2000 identified poor communication between the client and contractors as increasingly costly.

Contracts were based on concepts, not on a detailed finished design. The concept design also changed during construction, with floor space first increasing from 11,000 m² to 18,000 m² and ending up at 33,000 m². There were also increased anti-terror security measures including toughened glazing, which added another 10% to the final cost.

This all led to very many variations, in a six-month period between October 2002 and May 2003 there were 1,825 architect instructions which led to 4,600 instructions to trade contractors, with nearly 5000 variations in six months. Despite a design freeze that began in April, in May 2003 there were another 545 architect’s instructions. The time and cost implications are obvious. A report by the Auditor General in 2004 concluded that over 2000 design changes to the project were a major factor in the cost overrun.

During construction the lead architect died and the project director resigned. There were conflicts between the two architectural practices involved, and between them and the contractors. The Fraser Inquiry was critical of their dysfunctional relationship, poor communication and their claim, “without basis” that the building could be completed for £50 million.

By June 2001 the costs had escalated to £230 million. In 2002 the cladding contractor went into liquidation and the price increased to £300 million. By the time the building opened in September 2004 it was three years late and had cost a great deal more than the initial estimates. The eventual cost reported in 2007 was £414 million, 10 times the original estimate.

An inquiry was set up and the report was published in 2004. A major focus of the Fraser Inquiry was whether the procurement method or the client had caused the problems. A construction management contract is typically used on integrated design and construction projects, which is its strength, but is not particularly good at managing budgets. The original budget was obviously much too low, and this led to a lot of unwanted and probably unnecessary publicity about cost overruns. The main findings of the inquiry were the unrealistic nature of the initial cost estimates, use of a procurement model that passed risk wholly onto the state client, conduct of the tendering process and choosing the contractor, and security concerns that added to the cost but could have been anticipated. The conduct of civil servants was questioned.

The Fraser Inquiry identified two fundamentally flawed decisions. The first was procurement using a construction management contract instead of a Private Finance Initiative contract. Second was the insistence on a rigid program. The Scottish Office decided to use a construction management contract to speed construction, but without evaluating the financial risks of doing so, and without asking Ministers to approve it. Officials decided that rapid delivery of the new building was to be the priority, but that quality should be maintained, so cost blowouts were inevitable.

The client was obsessed with early completion and failed to understand the impact on cost and the completion date if high-quality work and a complex building were required. In attempting to achieve early completion, the management contractor produced optimistic programs, to which the architects were unwise to commit. The main causes of the slippage were delays in designing a challenging project that was to be delivered against a tight timetable.

Perhaps most damning in the inquiry’s report was the finding that senior civil servants withheld information on the problems between contractors and architects and the rising cost of the project from ministers. Ministers were not informed of concerns within the Scottish Office over the cost of the project and officials did not take the advice of the cost consultants, a serious failure of accountability.

In the final indignity the completed project suffered from flooding, as the original site had been a brewery and there were hidden underground springs. Then in 2006 one of the beams in the debating chamber swung loose due to missing and damaged bolts and poor glue, and the MPs were evacuated.

The lesson that is usually drawn from the Scottish Parliament building is that the client did not know what they wanted and proceeded with a brief that was poorly developed. However, the conduct of the civil servants involved was, in my view, deplorable. After the Fraser Inquiry’s report was handed down there were further investigations by the Scottish Parliament into their conduct, however no action was taken against any of the individuals involved.

Clearly, when civil servants get involved in these large complex projects, guidelines on governance need to be established and rigorous standards need to be enforced. One of the recommendations of the report was that independent advisers should be employed and those advisers need to have direct access to ministers, without their advice being filtered by public officials.

Holyrood is an extensively documented project. The link to the Fraser Inquiry report is below, the Conclusions and Findings are the most relevant. There is a Wikipedia page that is comprehensive, including a timeline of cost increases and many links.

http://www.webarchive.org.uk/wayback/archive/20150401033623/http://www.holyroodinquiry.org/FINAL_report/report.htm

This is one in a series of procurement case studies. Other ones are on the building of the British parliament house at Westminister in 1837 and Heathrow Terminal 5. 

Procurement case study: Westminster 1837

The Building of Westminster

At the beginning of the 19^th century in England, the building industry was undergoing major changes. For many years, even centuries before, building had been done by independent craftsmen belonging to guilds, or Companies, who usually worked directly for a client. The end of the 1700s, however, was the time of transition from these old, established ways to what eventually became known as the ‘modern system’ of contract labour and measuring to determine costs.

There were two key characteristics of this new procurement system. First was the use of detailed drawings and design, completed before the work began. The second was the preparation of cost estimates for the project, on the basis of the design drawings. The two significant outcomes of these characteristics, that became the foundations of the modern system, were the shift to competitive tendering and the emergence of the professions of architects, engineers, surveyors and contractors during the rebuilding of London after the Great Fire of 1666.

In the 1800s the general contractor emerged as a new type of firm, winning projects through competition, responsible for organising the building process, and employing craftsmen to undertake work directly or as subcontractors. By the middle of the 19^th century large contracting businesses had taken on the form that in many ways we still see today, and procurement and contracting was using a recognizably similar system.

The construction of Westminster from 1837 was one of the first major buildings to be done using the ‘modern system’ of procurement and contracting, with detailed drawings from the architect and a bill of quantities (BQ) with full estimates based on them. Under the earlier system of measure and value, costs had been determined on completion by a measurer, originally a tradesman, and over time this became a specialised task done by surveyors.

The story of the building of the New Palace of Westminster (the British Houses of Parliament) in the mid-nineteenth century is instructive. As told by Kingsford in Builders and Building Workers, the project used new engineering techniques and machinery, the skills of hundreds of traditional craftsmen and a huge work force managed by some of the largest contractors. There were between 400 and 1,400 men employed on the project at any one time in 1848, 776 were on site, 120 in quarries and 335 in the contractor’s workshop. The project was expected to take six years and cost £700,000, but actually took almost 30 years and cost over £2 million (well over £500 million or $1 billion in today’s money).

There were disputes between the architect who won the design competition, Charles Barry, and pretty much everyone else involved, starting before construction began. There were arguments over the initial design, over the estimates and the architect’s fees, there were disputes over contract prices and supply problems with the materials. The designer of the heating and ventilation system fell out with Barry and the two became enemies. The masons went on strike for 30 weeks after a foreman swore at them.

The project was carried out through a series of successive contracts awarded through competitive tender or by recommendation by Barry. The first two contracts were let by the government department in charge. The third contract was put out for tender to eight firms recommended by Barry, and was won by one of the largest London contractors (Grissell and Peto) who were then given the following four contracts by negotiation without further competition.

In the third contract the prices were set by the builder and agreed to by the architect, however in the fourth contract prices were determined by the government department and set lower than prices arrived at through competition. The assumption was that the new industrial technology appearing on building sites, such as mechanical scaffolding and steam powered hoists and pumps, would reduce the costs. These contracts had detailed specifications on all aspects of the work and were priced in a form recognizably similar to a modern bill of quantities. The work of each trade was specified separately. The contractor later renegotiated a new set of prices as these were profitless contracts otherwise.

The 1844 contract for ‘finishings’ was on a unit price basis, reduced by 22 percent by the Office of Works and Public Buildings on the basis that the new machinery coming into use would save time and labour. As it turned out much of the carpentry work, although initially carved by new machines, had to be completed by hand at significant extra cost. Grissell terminated the contract in 1845 and the complex negotiations that followed went on over many years. Building agreements in those days did not include provision for claims and variations.

This was also a time a rapid technological innovation and development, both by and for contractors. Satoh has six chapters on 19^th century technical advances in his Building in Britain, covering stone, wood, bricks, components, pumps and lifting machinery. Like other industries the widespread availability of steam power was transformational in the application of new machinery and the use of mechanization on building sites slowly increased. There was also an ongoing transfer of site work into the contractors' workshops. For the largest firms these were huge, William Cubitt (contractor brother of property developer Thomas Cubitt) had 25 acres on the Isle of Dogs in 1845, complete with wharves, sawmills, cement kilns, an iron foundry, brickfields, a pottery and so on, linked by an internal railway and employing about 800 men. Westminster was also where many of these new technologies and innovations were used, some of them for the first time.

During the 19^th century general contractors, often winning projects in competitive tenders, became responsible for organising projects and employing workers. While there were recognizable elements of the old system still in use in the 19^th century, the building industry was becoming a complex and confusing conglomeration of businesses and individuals. Many of these characteristics of the industry, as the example of the building of Westminster shows, are still part of the building and construction industry today. The same can be said for issues in procurement and contracting.

Many major modern projects have the same or similar story arc, such as the Scottish Parliament building (initially budgeted for £40 million and three years construction but taking six years and costing over £400 million.) and Australia’s Parliament House. The Sydney Opera House is famous not only for its location and design but also for its probable world record cost blowout of 1,400%. Other famous cost overruns in recent years include the Boston Big Dig and Denver airport, and all these projects had problems recognizably similar to those found in the building of the Palace of Westminster.

Satoh closes his book with a series of quotes from opponents of the modern system from the mid-nineteenth century. These include: poor quality work due to low price bidding, or subcontracting; builders undercutting each other to win work under the new system of competitive tenders; the lack of provision for variations in fixed price contracts; unjustified claims by contractors; arbitrary decisions by superintendents and architects; non-payment by clients; and collusion between contractors. To address these issues the procurement and contracting system began to incorporate increasingly detailed drawings and specifications, and a schedule of prices was often attached for claims and variations. The unilateral nature of the contract led to the drafting of the Conditions of Contract.

In 1870 the terms of a document called the Heads of Conditions of Builders Contracts was agreed between the Royal Institute of British Architects and the Builders’ Society This established the basic outline and principles of the standard building contract which could then be varied to particular circumstances, and addressed the concern of builders who felt that previous contracts made no provision for variations in materials prices or the cost of extra work. Bills of quantities were introduced as part of the contract in 1902, after many revisions in the meantime, and this remained the basic form until 1931 when the Joint Contract Tribunal was set up and the standard forms of contract came into use. These are still the basis of the majority of building contracts in the UK today.

In procurement and contracting in the building and construction industry change happens slowly. This may, however, not be true of the 21^st century.

This is one in a series of procurement case studies. Other ones are on the building of the  the Scottish parliament house Holyrood Building in 1997 and Heathrow Terminal 5.


References 

Kingsford, P.W. 1973. Builders and Building Workers, London: Edward Arnold.

Satoh, A. 1995. Building in Britain: The Origins of a Modern Industry, London: Scholar Press.